Home Equity Loan Guide: How to Borrow Against Your Home

A home equity loan allows you to borrow a lump sum against the equity you've built in your home, typically at a fixed interest rate with predictable monthly payments over 5 to 30 years. As of 2025, U.S. homeowners hold approximately $17.6 trillion in collective home equity—with $11 trillion considered "tappable" equity available for borrowing while maintaining a 20% ownership stake. Home equity loans offer lower interest rates than credit cards or personal loans because your home serves as collateral, but this also means your property is at risk if you can't make payments. This guide covers everything you need to know about home equity loans, including how they work, qualification requirements, costs, tax implications, and how to decide if borrowing against your home makes sense for your financial goals.

What Is a Home Equity Loan?

A home equity loan—sometimes called a second mortgage or home equity installment loan—lets you borrow against the portion of your home that you actually own. Unlike your primary mortgage which helped you purchase the property, a home equity loan taps into the value you've accumulated through mortgage payments and home appreciation.

Here's how it works: You receive the entire loan amount as a one-time lump sum at closing. From there, you make fixed monthly payments that include both principal and interest until the loan is paid off. The fixed interest rate means your payment amount stays the same throughout the loan term, making budgeting straightforward.

Your home serves as collateral for a home equity loan. This means if you fail to make payments, the lender can foreclose on your property to recover the debt—just like with your primary mortgage.

According to the Consumer Financial Protection Bureau, home equity loans provide access to significant funds at rates typically lower than unsecured borrowing options. However, the CFPB also warns that homeowners should carefully consider the risks before putting their home on the line.

How Home Equity Is Calculated

Before you can borrow against your home equity, you need to understand how much equity you actually have. The calculation is simple:

Home Equity = Current Market Value − Outstanding Mortgage Balance

For example, if your home is currently worth $400,000 and you still owe $250,000 on your mortgage, you have $150,000 in equity.

However, lenders won't let you borrow your entire equity amount. They use metrics called Loan-to-Value (LTV) and Combined Loan-to-Value (CLTV) to determine how much you can access:

LTV Ratio: Your first mortgage balance divided by your home's value
CLTV Ratio: All loans secured by your home divided by your home's value

Most lenders cap CLTV at 80-85% of your home's appraised value. Here's a practical example:

Let's say your home is worth $350,000 and you owe $200,000 on your mortgage. If a lender allows 85% CLTV:

Maximum total borrowing: $350,000 × 85% = $297,500
Minus existing mortgage: $297,500 − $200,000 = $97,500 available to borrow

About 45% of U.S. mortgaged homes are considered "equity-rich," meaning loan balances are 50% or less of market value. If you've owned your home for several years or bought in a high-appreciation area, you may have more tappable equity than you realize.

Home Equity Loan vs. HELOC: Understanding Your Options

When borrowing against home equity, you'll choose between a home equity loan and a home equity line of credit (HELOC). While both use your home as collateral, they work very differently.

Feature	Home Equity Loan	HELOC
How You Receive Funds	Lump sum at closing	Revolving credit line to draw from as needed
Interest Rate	Fixed	Typically variable (some fixed-rate options available)
Payment Structure	Fixed monthly payments from day one	Interest-only during draw period; principal + interest during repayment
Draw Period	Not applicable	Usually 5-10 years
Repayment Period	5-30 years	10-20 years after draw period ends
Best For	One-time large expenses (major renovation, debt consolidation)	Ongoing or unpredictable expenses (home improvements over time, emergency fund)
Closing Costs	Typically higher (2-5% of loan)	Often lower or waived by some lenders
Payment Predictability	Highly predictable	Less predictable due to variable rates

A home equity loan makes sense when you know exactly how much you need upfront—for example, a $50,000 kitchen renovation or consolidating high-interest credit card debt. The fixed rate provides payment certainty.

A HELOC works better for situations where you'll need funds over time or aren't sure of the total amount. It functions like a credit card secured by your home—you can borrow, repay, and borrow again during the draw period.

Interest Rates and How They're Determined

Home equity loan rates are typically fixed, meaning your rate stays the same for the entire loan term. As of late 2025, average home equity loan rates hover around 8.25%, though your specific rate depends on several factors.

Lenders use the prime rate as a baseline, then add a margin based on your risk profile. With the prime rate at approximately 6.75% as of December 2025, a lender might offer prime + 1.5% = 8.25% to a well-qualified borrower.

Factors That Affect Your Rate:

Credit score: Higher scores (740+) qualify for better rates
Loan-to-value ratio: Borrowing less relative to home value typically means lower rates
Debt-to-income ratio: Lower DTI signals lower risk to lenders
Loan amount and term: Larger loans and longer terms may carry different rates
Property type: Primary residences typically get better rates than investment properties

According to NerdWallet, shopping around is essential—rates can vary significantly between lenders. Getting quotes from at least three lenders could save you thousands over the loan term.

Qualification Requirements

To qualify for a home equity loan, you'll need to meet several criteria. While requirements vary by lender, here are the typical standards:

Requirement	Typical Minimum
Credit Score	620-680 (lower scores may qualify with higher rates)
Home Equity	15-20% minimum equity in your home
Maximum CLTV	80-85% of home's appraised value
Debt-to-Income Ratio	Below 43% (some lenders more flexible)
Income Verification	2+ years of documented income

Beyond these numbers, lenders will also require:

Property appraisal: To confirm your home's current market value
Title search: To verify clear ownership and identify any existing liens
Proof of homeowner's insurance: Required throughout the loan term
Income documentation: W-2s, tax returns, pay stubs, or profit/loss statements for self-employed borrowers

If your credit score falls below 620, you may still find lenders willing to work with you, but expect significantly higher interest rates. Consider improving your credit before applying—even a 50-point increase could save you thousands in interest.

If you're still working on building credit or reducing your mortgage balance, our first-time homebuyer guide covers strategies for strengthening your financial profile.

Closing Costs and Fees

Like your original mortgage, home equity loans come with closing costs. Expect to pay 1-5% of the loan amount in fees, though some lenders offer reduced or no-closing-cost options (usually with higher interest rates).

Fee Type	Typical Range
Origination fee	0.5-1% of loan amount
Appraisal fee	$300-$450
Credit report fee	$10-$100
Title search	$75-$200
Title insurance	0.5-1% of loan amount
Attorney/legal fees	$100-$300/hour or 0.5-1% of loan
Recording/notary fees	$20-$100

For a $50,000 home equity loan, closing costs could range from $500 to $2,500. According to Bankrate, you can often negotiate these fees or shop around for lenders with lower cost structures.

Ways to Reduce Closing Costs:

Compare offers from multiple lenders
Negotiate fees directly with the lender
Ask about existing customer discounts
Set up autopay for rate discounts (typically 0.25-0.5%)
Consider no-closing-cost options if you'll keep the loan long-term

For a detailed breakdown of what to expect at closing, see our closing costs guide.

Tax Implications: What's Deductible?

The tax treatment of home equity loan interest changed significantly under the Tax Cuts and Jobs Act of 2017, and understanding the rules could save—or cost—you money.

Current Rule: Home equity loan interest is only tax-deductible if the funds are used to "buy, build, or substantially improve" the home securing the loan. Interest on loans used for other purposes—like debt consolidation, paying for college, or funding a vacation—is not deductible.

According to the IRS, here's how it works in practice:

✅ Deductible: You take a $100,000 home equity loan to add a master suite to your home
❌ Not Deductible: You take the same $100,000 loan to pay off credit cards and student loans

Additionally, the maximum amount of combined mortgage debt (primary mortgage plus home equity) eligible for the interest deduction is $750,000 ($375,000 if married filing separately).

With the increased standard deduction, fewer homeowners itemize their deductions anyway. For the 2025 tax year, you'd need itemized deductions exceeding $14,600 (single) or $29,200 (married filing jointly) for the home equity interest deduction to benefit you.

Keep detailed records of how you use home equity loan funds. If you use the money for home improvements, save all receipts and contractor invoices in case of an IRS audit.

Best Uses for Home Equity Loans

Not all reasons to borrow against your home are created equal. Some uses build long-term wealth or provide genuine value, while others can lead to financial trouble.

Smart Uses for Home Equity:

Home improvements that add value: Kitchen remodels, bathroom updates, adding square footage, or energy-efficient upgrades. These may also qualify for the tax deduction.
Major necessary repairs: Replacing a roof, fixing foundation issues, updating electrical or plumbing systems
Debt consolidation: If you're paying 20%+ APR on credit cards, consolidating to an 8% home equity loan saves money—but only if you don't run up new debt
Emergency expenses: Medical bills, unexpected job loss, or other genuine emergencies
Education: May make sense if education significantly increases earning potential

Uses to Avoid:

Vacations or luxury purchases
Everyday living expenses
Investments in speculative assets
Paying off debt you'll immediately run back up

The practice of using home equity to pay off debt and then accumulating new debt is called "reloading." According to Investopedia, this pattern can lead to a dangerous debt cycle that ultimately results in bankruptcy or foreclosure.

If debt consolidation is your goal, our guide on debt payoff strategies can help you create a sustainable plan.

Risks of Borrowing Against Your Home

While home equity loans offer attractive rates and significant borrowing power, the risks are substantial:

1. Foreclosure Risk Your home is collateral. If you can't make payments, the lender can foreclose. Unlike credit card debt that might be discharged in bankruptcy, losing your home means losing your shelter and the equity you've built.

2. Underwater Risk If home values decline, you could owe more than your home is worth. This makes selling difficult and could result in financial losses. The 2008 housing crisis left millions of homeowners underwater on their mortgages.

3. Reduced Financial Flexibility Adding a second payment to your budget reduces flexibility for other goals. If your income decreases or expenses increase, that home equity payment doesn't go away.

4. Opportunity Cost The equity in your home could serve other purposes—like providing a cushion for emergencies or eventually funding retirement. Borrowing against it now means it won't be there later.

5. Extended Debt Timeline If you've been paying down your mortgage for years, taking a 15-year home equity loan extends how long you'll be making housing payments.

If you're considering refinancing your existing mortgage instead, our refinancing guide explains when that might be a better option.

How to Apply: Step-by-Step Process

Ready to move forward? Here's what the application process typically looks like:

Step 1: Assess Your Equity Use online home value estimators and recent comparable sales to estimate your home's current market value. Subtract your mortgage balance to determine approximate equity.

Step 2: Check Your Financial Profile Pull your credit reports from all three bureaus (free at AnnualCreditReport.com). Calculate your debt-to-income ratio. Address any errors on credit reports before applying.

Step 3: Shop Around Get quotes from at least three lenders—banks, credit unions, and online lenders. Consider mortgage brokers who can compare multiple options. Check if your current mortgage lender offers loyalty discounts.

Step 4: Compare Beyond Just Rates Look at total closing costs, origination fees, appraisal fees, prepayment penalties, and loan terms available. A slightly higher rate with lower fees might cost less overall.

Step 5: Submit Your Application Provide required documents including income verification (W-2s, tax returns, pay stubs), property information, identification, and documentation of existing debts.

Step 6: Underwriting and Appraisal The lender verifies your creditworthiness, orders a home appraisal, and conducts a title search. This typically takes 2-4 weeks.

Step 7: Closing Review loan documents carefully. Pay closing costs. Sign final paperwork. You'll receive your funds shortly after closing—often within a few days.

Important: Federal law gives you a three-day right of rescission for home equity loans. You can cancel the loan for any reason within three business days of closing.

Alternatives to Consider

A home equity loan isn't your only option. Depending on your situation, these alternatives might work better:

Cash-Out Refinance Replaces your existing mortgage with a larger loan, giving you the difference in cash. May offer better rates if current mortgage rates are lower than your existing rate, but comes with higher closing costs. Learn more in our refinancing guide.

Personal Loan No home collateral required, faster approval process, but higher interest rates and lower borrowing limits. Good for smaller amounts when you don't want to risk your home.

0% APR Credit Card For smaller expenses, a promotional 0% APR card lets you borrow interest-free for 12-21 months. Requires excellent credit and discipline to pay off before the promotional period ends.

401(k) Loan Borrow from your retirement savings without a credit check. However, you'll miss out on investment growth, and the loan typically must be repaid within five years—or immediately if you leave your employer.

If you're still paying private mortgage insurance, eliminating PMI through refinancing or reaching 20% equity might free up monthly cash flow without taking on new debt. See our PMI guide for details.

Frequently Asked Questions

Most lenders allow you to borrow up to 80-85% of your home's value, minus what you still owe on your mortgage. For example, if your home is worth $400,000 and you owe $250,000, you could potentially borrow up to $90,000 (at 85% CLTV: $400,000 × 0.85 = $340,000 − $250,000 = $90,000). Your actual limit depends on your credit score, income, and the specific lender's policies.

Most lenders require a minimum credit score of 620-680, though some may go lower. However, better credit scores qualify for significantly lower interest rates. A score above 740 typically gets you the best rates, while scores below 620 may limit your options or result in much higher costs. Consider improving your credit before applying if possible.

Only if you use the funds to "buy, build, or substantially improve" the home securing the loan. Interest on home equity loans used for debt consolidation, vacations, or other purposes is not tax-deductible under current law. The total mortgage debt eligible for interest deduction is capped at $750,000 for most filers.

The typical timeline is 2-6 weeks from application to closing, depending on the lender and how quickly you provide documentation. The appraisal and underwriting process usually takes the longest. Some online lenders offer faster turnaround times, while credit unions may take longer but offer better rates.

Yes. Your home serves as collateral for the loan. If you fail to make payments, the lender can foreclose on your property. This is the most significant risk of borrowing against home equity and why you should carefully consider whether you can afford the payments before taking out a loan.

It depends on your needs. Choose a home equity loan if you need a specific lump sum for a one-time expense and want predictable fixed payments. Choose a HELOC if you need flexibility to borrow different amounts over time or want to have a credit line available for emergencies. Home equity loans offer payment certainty; HELOCs offer flexibility but come with variable rate risk.

Most home equity loans can be paid off early without penalty, but some lenders charge prepayment penalties—especially if you pay off the loan within the first few years. Always ask about prepayment terms before closing. If there is a penalty, calculate whether paying it is worth eliminating the ongoing interest costs.

Conclusion

A home equity loan can be a powerful financial tool when used wisely. The combination of lower interest rates (compared to unsecured debt), fixed payments, and potential tax benefits makes it an attractive option for major expenses like home improvements or strategic debt consolidation.

However, the stakes are high. Your home is on the line, and taking on additional debt against your property should never be done lightly. Before borrowing:

Calculate your true equity and understand how much you can realistically afford to borrow
Compare offers from multiple lenders to find the best combination of rates and fees
Have a clear purpose for the funds and a plan to repay the loan
Consider the risks and ensure you have stable income to make payments
Explore alternatives that might meet your needs without putting your home at risk

If you've done the math and a home equity loan makes sense for your situation, shop carefully, understand all the terms, and use the funds strategically. Your home equity is a valuable asset—make sure borrowing against it moves you closer to your financial goals rather than further away.

Disclaimer: The information provided on RichCub is for educational purposes only and should not be considered financial, legal, or investment advice. We recommend consulting with a qualified financial advisor before making any financial decisions. RichCub may receive compensation through affiliate links or advertising on this site.

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